Introduction of Taxation Laws (Amendment) Bill, 2021: Background
- The post 2012 scenario added fears of retrospective taxation to certain companies undergoing tax assessments on account of capital gains arising from transfer of shares of a foreign company. It is argued that such retrospective amendments militate against the principle of tax certainty and damage India’s reputation as an attractive destination.
- This was brought about as a reason of landmark verdict of the Hon’ble Supreme Court in 2012 in the matter of Vodafone International Holdings BV ([2012] 17 taxmann.com 202 (SC)), wherein it was held that such transfer of shares of a foreign company would not give rise to taxable capital gains.
- In the past few years, major reforms have been initiated in the financial and infrastructure sector which has created a positive environment for investment in the country. The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment. Therefore, to attract the investment in India and to boost growth, this bill proposes to scrap a retrospective amendment.
- The bill has been passed by both houses of Parliament and now pending for Hon’ble President assent.
Brief Facts: The Vodafone Controversy
- In Vodafone International Holdings BV. case, Vodafone International Holdings (VIH), a Netherlands based Company procured 100% shares in CGP Investments (Holding) Ltd a company situated in Cayman Island, for USD 11.1 billion from Hutchison Telecommunications International Ltd in the year 2007. CGP, through different organizations and actions controlled 67% of Hutchison Essar Limited (HEL), an Indian Company. Vodafone got command over CGP and its downstream the subsidiaries including HEL through the acquisition.
- In 2007, the Tax authority issued a notice to Vodafone International Holdings (VIH) for not withholding tax in India. The said notice was challenged by Vodafone International Holdings (VIH) in the Bombay High Court however, the same was turned down citing [2010] 193 Taxman 100(Bombay).
- Thereafter, the matter was filed in the Hon’ble Apex court which held in the favor of Vodafone International Holdings (VIH) in view of the fact that the transfer of shares outside India does not amount to indirect transfer of any assets owned by the company in which the shares are so held. Accordingly, the Apex Court refused to lift the corporate veil of the foreign company holding shares in the Indian company.
- To overcome this ruling, the Government vide Finance Act, 2012 amended section 9(1) of the Income Tax Act (‘ITA’) by introducing the explanation 4 & 5 to tax the indirect transfer made of capital asset of a company having substantial value of asset in India.
There were a total seventeen cases which were under similar dispute and accordingly tax demands had been raised in these matters by the tax authority on similar lines.
Further, the dispute on account of two cases namely, Vodafone BV & Cairn Energy were referred to Arbitration Tribunal under Bilateral Investment Protection Treaty at the International Forum, which ruled in favor of the aforementioned taxpayers and against the Indian Income Tax Department.
Brief- The Taxation Laws (Amendment) Bill, 2021
In a bid to cover the phantom of review tax assessment, the tax authority on Thursday August 06, 2021, passed a Taxation Laws (Amendment) Bill, 2021 (“TLA Bill, 2021”) from the Lok Sabha to pull out all back tax requests on organizations, Cairn Energy and Vodafone and said it will refund the money gathered to authorize such levies (Without Interest).
The Bill accommodates the withdrawal of assessment request made on “Indirect Transfer of Indian resources if the exchange was executed before 28 May 2012 (i.e., the day the review tax enactment appeared).
Hence, after the existing 3rd proviso to explanation 5 of section 9, additional three provisos i.e., proviso 4, 5 & 6 are proposed to be added to give effect of the new bill.
It is additionally proposed to refund the sum paid in these cases with no interest consequently u/s 244A of Income tax act. The Bill has an immediate bearing on long-running assessment questions with British firms Cairn Energy Plc and Vodafone Group.
Proposals in the Bill:
- Proposed new 4th proviso provides that nothing in Explanation 5 shall apply to—
- an assessment or reassessment to be made under section 143, section 144, section 147 or section 153A or section 153C
- an order to be passed enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154 o
- an order to be passed deeming a person to be an assessee in default under sub-section (1) of section 201.
in respect of income accruing or arising through or from the transfer of an asset or a capital asset situate in India in consequence of the transfer of a share or interest in a company or entity registered or incorporated outside India made before the 28th day of May, 2012.
Analysis: It means, no demand will be raised in Future in context of any indirect transfer made till 27.05.2021. As retrospective amendment by Finance Act 2012 was made to cover all the indirect transfer done between April 01, 1961 till the date of getting President assent i.e. 28 May 2021, So for giving the relief it is proposed in this proviso that no order or demand can be raised in future for any indirect capital transfer covered by the section 9(1)(i) for any pending proceedings.
Proposed new 5th proviso provides that:
Where
- an assessment or reassessment has been made under section 143, section 144, section 147 or section 153A or section 153C; or
- an order has been passed enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154; or
- an order has been passed deeming a person to be an assessee in default under sub-section (1) of section 201; or
- an order has been passed imposing a penalty under Chapter XXI or under section 221,
in respect of income accruing or arising through or from the transfer of an asset or a capital asset situate in India in consequence of the transfer of a share or interest in a company or entity registered or incorporated outside India made before the 28th day of May, 2012 and the person in whose case such assessment or reassessment or order has been passed or made, as the case may be, fulfils the ‘specified conditions’.
Analysis: It means, demand raised or order passed to the extent to any indirect transfer made till 27.05.2021 will be nullified. But this effect will be issued once the specified condition as mentioned below will be fulfilled.
- Further it is also proposed to new 6th proviso to Explanation 5 clarifies that
- where any amount becomes refundable to the person referred to in fifth proviso as a consequence of him fulfilling the ‘specified conditions’, then, such amount shall be refunded to him, but no interest under section 244A shall be paid on that amount.
Analysis: It means, any demand collected or refund adjusted, will be refunded. But here it is pertinent to note that such refund will be without any interest i.e. without giving effect to section 244A.
Specified condition as used in aforesaid provisos 5 & 6 are reproduced as under:
- where the said person has filed any appeal before an appellate forum or any writ petition before the High Court or the Supreme Court against any order in respect of said income, he shall either withdraw or submit an undertaking to withdraw such appeal or writ petition, in such form and manner as may be prescribed;
- where the said person has initiated any proceeding for arbitration, conciliation or mediation, or has given any notice thereof under any law for the time being in force or under any agreement entered into by India with any other country or territory outside India, whether for protection of investment or otherwise, he shall either withdraw or shall submit an undertaking to withdraw the claim, if any, in such proceedings or notice, in such form and manner as may be prescribed;
- the said person shall furnish an undertaking, in such form and manner as may be prescribed, waiving his right, whether direct or indirect, to seek or pursue any remedy or any claim in relation to the said income which may otherwise be available to him under any law for the time being in force, in equity, under any statute or under any agreement entered into by India with any country or territory outside India, whether for protection of investment or otherwise; and
- such other conditions as may be prescribed.”.
Analysis: As per the condition the assessee or said person needs to withdraw any appeal filed or submit the undertaking to withdraw any initiation made against the order whether filed in India or outside India. The manner, form or other conditions will be notified in future.
Further in this proposed bill, a consequential amendment in section 119 is proposed by adding proviso same to the specified conditions mentioned above.
Concluding remarks:
Bringing the amendment retrospectively, provides an interim and much needed relief to the ongoing litigations created on account of indirect transfers in the aforesaid matters. However, it needs to be understood that as the amendment is only retrospective, hence prospective taxation shall continue to be taxed in the similar manner. Accordingly, on one hand it aims to end specific retrospective controversies created by executive parliamentary powers but however on the other hand, it also creates a dilemma for foreign investors with respect to Indian tax laws, as to the fact that such positions might recur in the future. However, as of now it is a much needed and welcome step for the companies involved in retrospective tax disputes pertaining to indirect transfers.
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The article has been contributed by
Sr. Manager-Direct Tax
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